President Joe Biden has proposed an increase in the capital gains tax rate. What is that exactly?
Capital gains are the profit that people make on investments like stocks, Bitcoin, or real estate when they sell them. There’s a story in Acts about a man who did something special with his capital gains. Barnabas sold a field and gave all the money from the sale to the Apostles for the needy. (Acts 4:36-37) God may not call all of us to that level of giving. But our wealth is a gift from God. Like Barnabas, we can trust Him to take care of us. Therefore, we can be generous with our earnings.
The capital gains tax is paid on profits made from an investment. But it only takes effect after a sale locks in the gain. Say you bought a share of Tesla stock at $200 early last year. Now it’s worth $500. You’ve made a profit of $300, but you won’t owe anything unless you sell. When you do, you’ll pay taxes on the $300 profit.
The proposed change would increase the tax on long-term capital gains (the profits on an asset held for a year or more).
President Biden wants the rate to rise for Americans who make more than $1 million in a year. It would go from 20% to 39.6%. With an additional 3.8% tax for high earners, the highest-earning Americans could pay a total tax rate of 43.4% on profits from long-term investments. The proposal would make the rate on investment gains similar to the rate on income made from working.
Only the top 0.3% of taxpayers may be affected, or about 500,000 households across the country. For everyone else, the current tax rate would stay the same.
The increase is part of President Biden’s plan to tax wealthy individuals and corporations to pay for programs to help lower-income families and children.
One reason tax rates have been lower on long-term capital gains is that supporters say it encourages long-term investment. That helps the economy overall. Some are concerned that rich investors will dump their stocks before the rate is increased, and that potential investors would be discouraged from buying stocks because of the higher rate. But stocks tend to go up over the long term. So a sale today—even to save on a tax payment—means an investor could be losing out on potential future gains that would be greater than the tax amount.
The proposal may change as it goes through Congress. Many expect Democrats and Republicans to try for a lower compromise rate.